The matching principle is the accounting principle that states, ‘recording the costs and earning of revenues should be in the same accounting period. It is part of ‘Generally Accepted Accounting Principles (GAAP).
The purpose of the matching principle is to maintain consistency across a business’s income statements and balance sheets.
The matching principle depends on the cause-and-effect relationship. If there is no cause and effect relationship, at that point, the accountant will charge the cost to the expense right away.
This article covers:
- What Is the Matching Concept in Accounting?
- What Is Revenue Recognition Principle?
- What Are the Benefits of the Matching Principle?
What Is the Matching Concept in Accounting?
The matching principle is an important component in the accrual method of accounting. The basic concept of the accrual accounting method is:
The matching principle in accounting states that matching the reporting revenues and expenses in the same period links the revenue with its profit.
Example of Matching Principle:
Match the expenses in a current period of time during which they incur rather than a time when payment is complete.
For example,
Suppose a business pays a 20% commission to sales assistants by the end of every month.
If the organization has $100,000 in deals in September, the organization will pay the commission of $20,000 next October.
The matching principle states that the commission expense needs reporting in September’s income statement. If a company uses the money basis of accounting, the reporting of commission should be in October (in the month they were paid) instead of September (the month in which they incur).
Other examples of the matching principle are:
- Depreciation
- Wages
- Worker rewards
What Is Revenue Recognition Principle?
It is a basic accounting principle which states, the recognition and recording of revenue should be in the same period it’s earning. It has nothing to do with the payment, whether it is received or not.
For Example:
A contractor who completes his job won’t wait for the payment. He earns his fee the moment he finishes the job.
What Are the Benefits of the Matching Principle?
For ensuring consistency in financial statements, businesses follow the matching principle. Earlier expense recognition may result in a lower net income. If you recognize the expenses at the wrong time, you may get the inaccurate financial report of a business. The matching principle helps you to balance the cost over a period once you recognize it at the right time.
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